ITT Educational Services - Senate

ITT Educational Services ___________________________________

Introduction

ITT Educational Services Corporation, Incorporated ("ITT") is one of the largest for-profit education companies, and offers primarily 2-year and some 4-year degrees in a number of subjects. Like many others in the sector, in recent years ITT has experienced significant growth in student enrollment, Federal funds collected, and profit realized. While the company student withdrawal rates are lower than many large publicly traded for-profit education companies, ITT's student loan default rates are higher than most. Additionally, ITT offers some of the most expensive programs of any forprofit college, forcing many students to borrow the maximum available Federal aid and to take on additional private debt.

Company Profile

ITT is a publicly traded for-profit educational institution headquartered in Carmel, IN. ITT operates a total of 145 campuses in 35 States, along with an online division, and offers Associate, Bachelor's and Master's programs in electronics, drafting and design, criminal justice, business, information technology, health sciences, and nursing.2062 Approximately 85 percent of ITT students are enrolled in associate programs.2063 The largest programs at ITT are IT computer network systems, computer and electronics engineering technology, and computer drafting and design, which account for 75 percent of all students.2064

ITT operates two brands, ITT Technical Institute ("ITT Tech"), which accounts for 99 percent of the company's students, and Daniel Webster College, New Hampshire-based with approximately 600 students. ITT Tech campuses are accredited through a national accreditor, the Accrediting Council for Independent Colleges and Schools (ACICS). Daniel Webster College is regionally accredited by the New England Association of Schools and Colleges, Inc. (NEASC).

ITT was founded in 1946 and has been publicly traded since its 1994 initial public offering (IPO). Large institutional investors in the company include Blum Capital Partners (which owns 15.8 percent of the company), Wellington Management Company (13.99 percent), Select Equity Group (6.5 percent), and Providence Equity Group (5.6 percent).2065

The current chairman and chief executive officer of ITT is Kevin Modany. Modany has served as chairman since February 2008, and as CEO since April 2007. He also served as president from April 2005 through March 2007.

2062 For list of campuses see (Accessed May 4, 2012). 2063 ITT Educational Services, "ITT Educational Services at Robert W. Baird and Co. Inc. Business Solutions Conference," Lexis Nexis, February 29, 2012. 2064 ITT Educational Services, "ITT Educational Services at Robert W. Baird and Co. Inc. Business Solutions Conference," Lexis Nexis, February 23, 2011. 2065 Blum Capital Partners (S13D Filed 2/28/2012), Wellington Management Company (S13G Filed 2/14/2012), Select Equity Group (S13G Filed 2/14/2012), and Providence Equity Group (S13G Filed 2/13/2012).

515

100,000 90,000 80,000

Enrollment at ITT Educational Services, Inc., 2000-10

88,004 79,208

70,000 60,000 50,000 40,000 30,000

61,556

28,639

31,815

33,799

36,974

42,183

44,331

48,155

53,675

20,000

10,000

0 Fall 2000 Fall 2001 Fall 2002 Fall 2003 Fall 2004 Fall 2005 Fall 2006 Fall 2007 Fall 2008 Fall 2009 Fall 2010

In the fall of 2010, 88,004 students were enrolled at ITT,2066 a more than 200 percent increase since 2000. Enrollment fell slightly, in 2011 to 79,219 students. This drop in enrollment led to a drop in both revenue and profit. Eighty percent of the variance in new students is attributable to the company's decision to limit new enrollment in the criminal justice program.2067 According to ITT's CEO, the reason for this limitation is concern regarding outcomes of criminal justice students.2068

ITT's growth has been the result of aggressive campus expansion, as the company adds about 8 to 10 new locations per year.2069 The company has identified at least 50 additional locations that they see as "viable opportunities to continue to expand." 2070

ITT's revenue has grown along with enrollment, more than doubling from $757.8 million in 2006 to $1.6 billion in 2010.2071

2066 Enrollment is calculated using the Securities and Exchange Commission quarterly or annual filing for the August-October period each year. See Appendix 7. 2067 ITT Educational Services, 2011, Q4 Earnings Conference Call with Investors. 2068 Id. Internal documents demonstrate that at one individual campus criminal justice has the highest drop-out rate. ITT Educational Services, Criminal Justice and Composition March Department Meeting (ITT-00036911). 2069 ITT Educational Services at Robert W. Baird and Co. Inc. Business Solutions Conference. February 29, 2012. 2070 Id. 2071 Matching the drop in enrollment, revenue fell in $1.4 billion in 2011. Revenue figures for publicly traded companies are from Securities and Exchange Commission annual 10-K filings. Revenue figures for privately held companies are taken from the company financial statements produced to the committee. See Appendix 18.

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Daniel Webster College

Daniel Webster College was acquired by ITT in 2009 for $20.6 million.2072 According to news reports, the primary rationale for the purchase was because ITT wanted to acquire a regionally accredited college.2073

Following the acquisition, ITT fired one fourth of the staff, including the school president. Interviewed in early 2012, the former president stated, "ITT didn't have much interest in anything other than having acquired a regionally accredited institution" and that "if [he] had to do it all over again, [he] wouldn't have gone anywhere near ITT. The fundamental nature of the college has changed." 2074 He went on, "ITT came in and said, `we only want faculty to teach, we'll develop curricula in Carmel, Indiana and give them to you." 2075

Asked about Daniel Webster's growth potential, Michael Clifford (an investor involved in the formation of both Grand Canyon Education and Bridgepoint Education) noted that he believed that Daniel Webster College, "could parallel Grand Canyon or Bridgepoint's growth curve." 2076 While ITT initially had difficulty obtaining approval from the regional accreditor, after 2 years the company has finally obtained approval to begin to offer online programs (specifically business administration at the Associate, Bachelor's, and Master's level).2077

Federal Revenue

Nearly all for-profit education companies derive the majority of revenues from Federal financial aid programs. Between 2001 and 2010, the share of title IV Federal financial aid funds flowing to forprofit colleges increased from 12.2 to 24.8 percent and from $5.4 to $32.2 billion.2078 Together, the 30 companies the committee examined derived 79 percent of revenues from title IV Federal financial aid programs in 2010, up from 68 percent in 2006.2079

In 2010, ITT reported 60.8 percent of revenue from title IV Federal student aid programs.2080 However this amount does not include revenue received from the Departments of Defense and Veterans

2072 ITT Educational Services, 2009, Q2 Earnings Conference Call with Investors. 2073 "Your Taxes Support For-Profits as They Buy Colleges" Bloomberg. Daniel Golden. March 4, 2012. 2074 Id. 2075 Id. 2076 Id. 2077 ITT Educational Services, "ITT Educational Services at Robert W. Baird and Co. Inc. Business Solutions Conference," Lexis Nexis, February 29, 2012. 2078 "Federal financial aid funds" as used in this report means funds made available through Title IV of the Higher Education Act, including subsidized and unsubsidized Stafford loans, Pell grants, PLUS loans and multiple other small loan and grant programs. See 20 U.S.C. ? 1070 et seq. Senate HELP Committee staff analysis of U.S. Department of Education, Federal Student Aid Data Center, Title IV Program Volume Reports by School, (accessed July 12, 2012), 2000-1 and 2009-10. Figures for 2000-1 calculated using data provided to the committee by the U.S. Department of Education. 2079 Senate HELP Committee staff analysis of Proprietary School 90/10 numerator and denominator figures for each OPEID provided to the U.S. Department of Education pursuant to section 487(d)(4) of the Higher Education Act of 1965. Data for fiscal year 2006 provided to the committee by each company; data for fiscal year 2010 provided by the Department of Education on October 14, 2011. See Appendix 9. 2080 Senate HELP Committee staff analysis of fiscal 2010 Proprietary School 90/10 numerator and denominator figures for each OPEID provided to the U.S. Department of Education pursuant to section 487(d)(4) of the Higher Education Act of 1965. Data provided by the Department of Education on October 14, 2011. See Appendix 9.

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Affairs education programs.2081 Department of Defense Tuition Assistance and post-9/11 GI bill funds accounted for approximately 5.1 percent of ITT's revenue, or $87.8 million.2082 With these funds from the Departments of Defense and Veterans Affairs included, 65.8 percent of ITT's total revenue was comprised of Federal education funds.2083 Additionally, ITT was able to mitigate potential 90/10 issues through the creation of a large scale semi-private lending program known as PEAKS.

ITT Educational Services, Inc. Federal Money Share, 2010

Federal Education Funds: $1.1 Billlion

34.2%

65.8%

Federal Education Funds Non-Federal Funds

Over the past 10 years, the amount of Pell grant funds collected by for-profit colleges as a whole increased from $1.4 billion to $8.8 billion; and the share of total Pell disbursements that for-profit

2081 The Ensuring Continued Access to Student Loan Act (ECASLA) increased Stafford loan amounts by up to $2,000 per student. The bill also allowed for-profit education companies to exclude the increased amounts of loan eligibility from the calculation of Federal revenues (the 90/10 calculation) during fiscal years 2009 and 2010. However, ECASLA calculations for ITT could not be extrapolated from the data the company provided to the committee. 2082 Post-9/11 GI bill disbursements for August 1, 2009-July 31, 2010 provided to the committee from the Department of Veterans Affairs on November 5, 2010; post-9/11 GI bill disbursements for August 1, 2009-June 15, 2011 provided to the committee from the Senate Committee on Veterans' Affairs via the Department of Veterans Affairs on July 18, 2011; Department of Defense Tuition Assistance disbursements and MyCAA disbursements for fiscal years 2009-11 provided (by branch) by the Department of Defense on December 19, 2011. Committee staff calculated the average monthly amount of benefits collected from VA and DOD for each company, and estimated the amount of benefits received during the company's 2010 fiscal year. See Appendix 11 and 12. 2083 "Federal education funds" as used in this report means Federal financial aid funds combined with estimated Federal funds received from Department of Defense and Department of Veterans Affairs military education benefit programs. See Appendix 10.

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colleges collected increased from 14 to 25 percent.2084 Part of the reason for this increase is that Congress has repeatedly increased the amount of Pell grant dollars available to a student over the past 4 years, and, for the 2009-10 and 2010-11 academic years, allowed students attending year-round to receive 2 Pell awards in 1 year. Poor economic conditions have also played a role in increasing the number of Pell eligible students enrolling in for-profit colleges.

Pell Funds Collected by ITT Educational Services, Inc., Award Years 2007-10

300

$264

250

Dollars in Millions

200

150

100

$84

50

$102

$149

0 2007

2008

2009

2010

ITT tripled the amount of Pell grants it collected, from $84 million in 2007 to $264 million in 2010. 2085

Spending

While the Federal student aid programs are intended to support educational opportunities for students, for-profit education companies direct much of the revenue derived from these programs to marketing and recruiting new students and to profit. On average, among the 15 publicly traded

2084 Senate HELP Committee staff analysis of U.S. Department of Education, Federal Student Aid Data Center, Title IV Pell Grant Program Volume Reports by School, 2001-2 and 2010-11, .

2085 Pell disbursements are reported according to the Department of Education's student aid "award year," other revenue figures are reported according to the company's fiscal year. Senate HELP Committee staff analysis of U.S. Department of Education, Federal Student Aid Data Center, Title IV Pell Grant Program Volume Reports by School, 2006-7 and 2009-10, (accessed July 12, 2012). See Appendix 13.

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